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Chanticleer Holdings (HOTR): Turning Down The Fire

by Sonya Colberg, Senior Editor - 5/21/2015 10:35:32 AM

Chanticleer Holdings (HOTR) has recently been scorching hot. Yet its business plan is so cold, it could have frozen the raunchy wit right off legendary sex symbol Mae West.

But let’s imagine she would have fluttered her dreamy eyelashes, patted a blond wave and recovered quickly enough to reveal the secrets of the North Carolina company that owns 46 company-owned and franchise locations, including 13 Hooters, six American Burger Co. restaurants, plus seven Just Fresh and 20 BGR locations.

We’ll let Mae and other voluptuous sirens help unveil some risks slinking up on HOTR.

*HOTR’s Nothing Without You, Seeking Alpha.

“Plastic surgeons are always making mountains out of molehills,” Dolly Parton once said. When it comes to HOTR, just substitute “Seeking Alpha authors” for “plastic surgeons” and you get the idea.

In an interview with the chief executive published April 16, for example, a Seeking Alpha author prompted CEO Mike Pruitt to hype HOTR’s far-from-beautiful financials this way:

“When profitability is reached, what is your philosophy on use of cash? Returned via cash dividends or buybacks, or 100% retained for possible future acquisitions? When do you expect the company to be in a position to return cash to shareholders?”

Really? Profitability? Following year after year of losses, now exceeding $21 million? Mr. Pruitt replied: 

“If we cannot find accretive acquisitions, which for the foreseeable future I cannot imagine, it would be to return cash to shareholders via dividends.”

Despite posting a bigger loss of $2.6 million last quarter amid bigger expenses, Mr. Pruitt previously said they believe efforts such as acquisitions will “lead us to achieve profitability by year end.” Yet SEC filings say HOTR may never make a dime:

 “We have not been profitable to date and expect our operating losses to continue for the foreseeable future; we may never be profitable.

“Operating losses may continue for the foreseeable future: we may never be profitable.”

While HOTR’s serial acquisition habit (~10 general acquisitions since 2011, ) did bump revenue to $28 million last year, HOTR still found itself digging deeper into net losses for the year -  a long, long way from profitability, as this chart shows:

HOTR

  2014

2013

Cash balance

  $246K

$443K

Net Loss

  $ 6.6 m

 $5.4m

Salary & benefits

   $2.0   m

 $1.0m

(Source: SEC filing)

HOTR fans seemed to be buying into Mae West’s come-hither contention: “Cultivate your curves – they may be dangerous but they won’t be avoided.”

Indeed, HOTR was just getting warmed up.

Not to be outdone by the SA author’s exclusive interview with the CEO, FinancialBuzz flew in with its own exclusive interview that it hyped March 30 with a PR Newswire promo.

Another author added his twist to Seeking Alpha’s list of almost exclusively bullish pieces about two weeks later, boosting the stock about 10 percent.

Establishments of good repute, as Ms. West might have called them, don’t have a hype machine huffing out orchestrated promotional material. They don’t need it.

*Dilution Likely Coming

We’ve seen that certain hunger for cash in HOTR’s financials, exacerbated by its serial acquisition habit. But roll-up companies often find acquisitions divert management attention and cost more than they’re ultimately worth – particularly risky when the company’s cash has dwindled down to $246,000.

Shortly after the puff pieces had a chance to do some magic, the company filed an April 27 registration statement that will allow it to peel off $15 million worth of stock, warrants, etc. from time to time. It’s already signed a letter of intent presumably to chew into some of those shares with a deal to acquire eight Better Burger stores.

As startling as this potential dilution may be, it’s nothing new. The company’s SEC filings are crowded with descriptions of stock offerings and convertible debt, including convertibles in January, February and March.

In fact, HOTR just completed a $7.8 million rights offering for 3.9 million shares of common stock.

So the potential dilution looming ahead is business as usual to a serial stock issuer like HOTR.

*900,000 Warrants Loom

Additionally, HOTR is getting 900,000 warrants for stock ready so that selling shareholders can strip away shares of the company very soon.

We’ll explain below our misgivings about HOTR’s lack of larger investors. But the warrant deal is extra worrisome because two big shareholders – At Media Corp. and Aton Select Fund Ltd. – will shed 180,000 shares and 720,000 shares respectively. That means, as shown on page 19, both are dumping all their shares that cost just $2-$2.50.

Well, maybe the upcoming wave of potentially dilutive actions amounts to what Ms. West once purred: “The best way to behave is to misbehave.”

*Virtually No Institutional Following

Institutional and mutual fund interest in a company is something to check on, particularly when an unknown company suddenly gets a brief flurry of undeserved attention.

Here’s the institutional interest in HOTR:

(Source: Yahoo Finance)

What’s so wrong with HOTR attracting virtually no attention from the big boys who can grab shares at a discount to everyone else?

They’ve got more interesting trades to make. And the share rallies that occur primarily on Seeking Alpha promotional efforts indicate that retail investors – the average Joes and Joans who lack the time and expertise to conduct heavy due diligence – will be stuck with the bar tab when all the other folks go running off in search of the next big show.

 

*Lawsuit, Late 10-Q and Material Weakness Issues

Finally, early signs of deeper troubles may show themselves in the form of lawsuits, late financial filings and especially material weakness disclosures. Investors can see a settled lawsuit here, and another under appeal here for HOTR.

HOTR just got out its 10-Q … finally. It shows net loss for the quarter jumped to $2.4 million (from $1.5 million loss prior year), revenue up to $8.7 million versus $5.3 million previously, cash at $3.3 million and notes HOTR is trying to address material weaknesses that could lead to misstatements in financial reports.

Conclusion:

HOTR is flying on Seeking Alpha authors’ promotions – an area begging for more investigation - serial acquisitions and stock offerings, lawsuits, analyst disinterest, looming dilution and continuing weak financials made all the more dicey by a material weakness finding.

We agree with the bodacious Miss Piggy, who flung back her long, blond locks and said, “Beauty is in the eye of the beholder. And it may be necessary from time to time to give a stupid or misinformed beholder a black eye.”

Shareholders better duck.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in HOTR and stand to profit on any future declines in the stock price. 

Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to editor@thestreetsweeper.org or scolberg@thestreetsweeper.org.

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